1. … not reproduced
2. … not reproduced
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4. Other Income for the fifteen months ended June 30, 2006 included a sum of Rs. 2,672.20 lakh towards certain subsidy provided to the Company by one of its suppliers in conjunction with lease of aircrafts on operating lease basis. The previous auditors had reported that they were of the opinion that such accounting treatment was not in accordance with Accounting Standard 19 on “Leases” and the subsidy should be recorded on a straightline basis over the period of the lease. Their audit report on the financial statements for the fifteen months ended June 30, 2006 was modified in this matter. We concur with the views of the said auditors in principle that such subsidy should be recognized on a systematic basis in the Statement of Profit and Loss over the periods necessary to match them with the related costs, which they are intended to compensate although the matter does not appear to be covered explicitly by the said AS 19.
5. Attention is invited to note 48 of the Notes forming part of the Financial Statements (‘Notes’) regarding method of accounting of costs incurred on major repairs and maintenance of engines of aircrafts taken on operating lease during the year aggregating to Rs. 28,480.24 lakh (year ended March 31, 2011 Rs. 12,256.85 lakh) (aggregate amount as at March 31, 2012 Rs. 36,978.84 lakh), which have been included under fixed assets and amortized over the estimated useful life of the repairs. In our opinion, this accounting treatment is not in accordance with current accounting standards.
6. As reported in paragraph 6 of our report dated July 28, 2009, the Company novated its rights in certain aircrafts purchase agreements during the year ended March 31, 2009 in favor of certain lessors and took such aircrafts back on operating lease from the same persons. The Company incurred a loss of Rs. 8,110.36 lakh on such novation (including interest on loans borrowed for making predelivery payments to aircraft manufacturers of Rs. 2,706.77 lakh) (after eliminating loss in respect of redelivered aircrafts). As already reported in the said report, in the absence of an independent valuation report, we had relied on the representations of the management that the novation was not established at fair value, the fair value of the aircrafts is at least equal to or more than the cost of acquisition and the preconditions specified in AS 19 for deferring the said loss are satisfied. We do not express any independent opinion in the matter.
7. Attention is invited to note 49 of the Notes regarding use fees/hourly and cyclic utilization charges payable by the Company in respect of certain assets taken on operating lease aggregating to Rs. 6,033.53 lakh (year ended March 31, 2011 Rs. 5,576.45 lakh) (aggregate amount till March 31, 2012 Rs. 12,418.61 lakh), as maintenance reserves, in accordance with its understanding. Pending formalization of understanding with the relevant lessor, we do not express any independent opinion in the matter.
8. Attention of the members is invited to note 52 of the Notes regarding write back of withholding tax earlier accrued and non-provision for withholding tax for the year, on amounts paid/provided as payable to certain non-residents/ interest thereon, based on professional advice. This is subject to receipt of certain documentation from the relevant payees, the Company complying with the requisite formalities under the relevant tax laws and validation of the position stated in the books of account.
9. Attention of the members is invited to note 36(b) of the Notes regarding write back/non provision for guarantee and security commission to guarantors, which we understand was done at the behest of the consortium bankers (aggregate amount Rs.13,772.30 lakh). We understand that consent of the concerned guarantors has not been received. We cannot express any opinion in the matter.
10. Attention of the members is invited to note 39 of the Notes regarding recognition of deferred tax crediton account of unabsorbed losses and allowances during the year aggregating to Rs.111,808.46 lakh (year ended March 31, 2011 Rs. 49,341.80 lakh) (Total amount recognized up to March 31, 2012 Rs. 404,586.77 lakh). This does not satisfy the virtual certainty test for recognition of deferred tax credit as laid down in Accounting Standard 22.
11. We further report that, except for the effect, if any, of the matters stated in paragraphs 6 to 9 above, paragraph 1(b) of the annexure to this report and notes 34(a), 44, 46 and 53 of the Notes, whose effect are not ascertainable, had the observations made in paragraphs 4, 5 and 10 above been considered,the loss after tax for the year ended March 31, 2012 would have been Rs. 344,402.41 lakh (March 31, 2011 – Rs. 155,349.03 lakh) as against the reported loss of Rs. 232,800.75 lakh (March 31, 2011-Rs. 102,739.80 lakh), earnings per share would have been Rs.(68.92) (March 31, 2011 – Rs.(59.90)) as against the reported figure of Rs. (46.92) (March 31, 2011- Rs. (40.16)), debit balance in statement of profit and loss as at March 31, 2012 vide note 4 of the Notes would have been Rs.1,192,423.76 lakh (March 31, 2011 – Rs. 848,021.34 lakh) as against the reported figure of Rs.767,648.18 lakh (March 31, 2011 – Rs. 534,847.43 lakh), Other current liabilities would have been Rs. 321,876.74 lakh (March 31, 2011 – Rs. 202,878.92 lakh) as against the reported figure of Rs. 321,864.34 lakh (March 31, 2011 – Rs. 202,600.40 lakh), fixed assets would have been Rs.124,126.34 lakh (March 31, 2011- Rs. 137,071.61 lakh) as against the reported figure of Rs.144,302.75 lakh (March 31, 2011 – Rs. 157,188.69 lakh), deferred tax asset (net) as at March 31, 2012 would have been Nil (March 31, 2011 – Nil) as against the reported figure of Rs. 404,586.77 lakh (March 31,2011 – Rs.292,778.31 lakh). Data for the year ended March 31, 2011 recast from that stated in our previous year’s report taking into account deferred tax credit to be derecognized.
12. Attention of the members is invited to note 45 of the Notes regarding the financial statements of the Company having been prepared on a going concern basis, notwithstanding the fact that its net worth is completely eroded. The appropriateness of the said basis is inter alia dependent on the Company’s ability to infuse requisite funds for meeting its obligations, rescheduling of debt and resuming normal operations.
Further to our comments in the annexure referred to above, we report that:
13. We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of our audit.
14. In our opinion, the Company has kept proper books of account as required by Law so far as appears from our examination of those books.
15. The Balance Sheet, Statement of Profit and Loss and Cash Flow Statement dealt with by this report are in agreement with the books of account.
16. In our opinion, subject to the effect of the matters stated in paragraphs 4 to 6 and 10 above, the Balance Sheet, Statement of Profit & Loss and Cash Flow Statement dealt with by this report comply in all material respects, with the mandatory Accounting Standards referred to in sub-section (3C) of section 211 of the Act.
17. … (not reproduced)
18. In our opinion and to the best of our knowledge and according to the information and explanations given to us, the said accounts subject to note 43 of the Notes and read with other notes, give the information required by the Act in the manner so required and subject to the effect of the matters stated in paragraphs 4 to 11 above, foot note to note 38(a) regarding carve out of certain costs from their natural heads based on estimates made by management and presentation of the same as ‘Restructuring/Idle costs’ and note 46 of the Notes regarding the basis of computation of unearned revenue (including refunds due on account of cancelled tickets/ flights) as at March 31, 2012 (Data of number of unflown tickets and their aggregate average value, based on which management has estimated the amount of unearned revenue, not being drawn from accounting records, have not been verified by us) (Effect thereof on revenue not ascertainable) give a true and fair view in conformity with the accounting principles generally accepted in India.
…..
Mahanagar Telephone Nigam Limited (31-3-2012)
Note: None of the portions of the report as printed in the annual report is in bold/italics.
4. Further to our comments in the Annexure referred to in paragraph 3 above and subject to:
a) Point No.6 (a) to Note No. 40 regarding deduction u/s. 80IA of the Income Tax Act claimed by the company of which 75% has already been allowed upto Tribunal level and the company has preferred an appeal for the remaining 25% with the High Court. The company is maintaining a provision for income tax amounting to Rs. 4003.31 million for the years 1997-98 to 1999-2000 on this account, whereas the similar claims for subsequent years involving a tax liability of Rs. 3948.46 million have been shown as Contingent Liability. In view of the pending disputes with the Income Tax Departments at the High Court level, we are unable to comment on the adequacy or requirement of the provision or contingency held in this regard.
b) Point No. 6 (b) to Note No. regarding accounting of appeal to the effect of Rs. 1015.43 million including accrued Interest of Rs.412.04 million (Rs.101.86 million for the year) as recoverable, is subject to adjustment as per the final orders to be passed by the Income Tax Department. Besides, the balances appearing in Advance Tax, Provisions for Income Tax and Interest on Income Tax Refund are subject to reconciliation with the figures of the Income Tax Department.
c) Points No.11 & 14 to Note No. 40 regarding the amounts recoverable from BSNL/DOT are subject to reconciliation and confirmation and in view of various pending disputes regarding each other’s claims, we are unable to comment on the impact of the same on the profitability of the company.
d) Point No. 1(k) of Note 40 regarding disclosure of contingent liability of Rs. 1403.63 million, instead of actual provision on account of License Fee to the DOT which is being worked out on accrual basis as against the terms of License Agreements according to which the expenditures/ deductions from the Gross revenue are allowed on actual payment basis.
e) The company has allocated the establishment overheads as per Note 25 and Administrative overheads as per Note 28.The company’s policy in this regard needs to be made more scientific and the same should avoid capitalising the loss due to idle time of labour and machines.
f) Point No.32 of Note No. 40 regarding no impairment adjustment required to the carrying value of the fixed assets as at 31st March 2012. In our view, due to recurring losses incurred by the Company and uncertainty in the achievement of projections made by the Company, we are unable to comment on the provisions, if any, required in respect of impairment of carrying value of the fixed assets (including capital work in progress), other than land, and its consequential impact, if any, on the loss for the year, accumulated balance in the Profit and Loss Account and the carrying value of the fixed assets as at 31st March 2012.
g) Point No. 27 (ii) of Note No.40 regarding the provision for employees benefits which have been made on the basis of actuarial valuation. The issue being technical, we are unable to comment on the adequacy or otherwise of these provisions.
h) Point No. 28 of Note No. 40 regarding Non provision of actuarial liability on account of medical expenses for retired employees and continuing employees as the Insurance policy has been taken by the company and yearly premium is only charged.
i) Insurance claim for the fire loss in Data Center in July, 2009 amounting to Rs. 40 million has been considered as good despite of the same being still pending with the Insurance Company.
j) Accounting Policy No.2 (iv) regarding valuation of scrapped/ decommissioned assets which are not being revalued every year.
k) Accounting Policy No. 1(ii)(b) regarding exclusion of dues from operators for making provision for Doubtful debts and non-provision of disputed cases which are outstanding for less than three years in Basic and less than six months in wire-less services.
l) Point No. 22 of Note No. 40 regarding non valuation of vacant land and Guest Houses/Inspection quarters at fair market value as at the year-end for the purpose of wealth tax provisions.
m) Point No.18 of Note No.40 regarding non confirmation and reconciliation of amounts receivable and payable from various parties.
n) Point No.14(b) regarding balance in subscriber’s deposits account of Rs. 588.81 million, unlinked receipts from subscribers Rs. 412.60 million are subject to reconciliation. Balance of sundry debtors as per Ageing Summary is short by Rs. 94.70 million with comparison to balance in general ledger though the same has been fully provided for (Refer Note No. 14(c)). The reconciliation of metered and billed calls in various units and leased, operational and billed circuits is in process. The final impact of above on the accounts is presently not ascertainable and the same may have an impact on the Profitability of the company.
o) The matching of Billings for roaming receivables/payable with the actual traffic intimated by the MACH is not being made and the amounts received are allocated on estimated basis. The impact thereof, on profitability, if any, is unascertainable.
p) The system of issuance of completion certificates by engineering department needs to be strengthened. The impact due to the delay in issuance of completion certificate on Fixed Assets and Depreciation is not ascertainable.
q) Point No.23 of Note No. 40 regarding provision for ADCC recoverable from Project Development Company amounting to Rs. 91.25 million and non-accounting of interest thereon in absence of explicit agreement to that effect.
r) Point No. 34 of Note No. 40 regarding non deduction of tax at source on services received from BSNL and treatment of the expenditure on account of Pension liability on the basis of actuarial valuation as an allowable expense based on experts opinion.
s) The Company had accounted for Rs. 2850.00 million towards wet lease for infrastructure and other services provided in respect of Commonwealth Games during the year 2010-11 of which Rs. 430 million is subject to acceptance and final settlement.
t) The reconciliation of Income from Re-charge Coupons, ITC Cards, Prepaid calling cards and stock of recharge coupons and leased circuits is not available for our verification.
u) No service tax is being charged on the revenue sharing with BSNL for inward circuits for which no bills are being raised.
v) The material sent to BSNL on barter basis, the VAT liability on this account has not been ascertained and provided for.
w) Point No 26 of Note No 40 regarding the requisite information & details for the identification of Micro, Small & Medium enterprises, as such we are unable to comment upon the compliance of section 15 & 22 of the Micro Small & Medium Enterprises Development Act-2006.
x) The Company has not made following disclosures required under Schedule VI of the Companies Act, 1956 as per references given after each item:
i. Consumption of imported and indigenous stores and spares and Percentage to the total consumption;
ii. The classification of Trade Receivable as unsecured, without considering the security deposit that the company has received from subscribers;
iii. Trade Receivable figures outstanding for more than six months and up to six months, are ascertained by the management and relied upon by the auditors.
iv. The Land and Buildings transferred from DOT have been classified as Leasehold as there was no breakup available.
v. The bifurcation of assets and liabilities into Current and Non Current, has been made by the company as per their own assessment of their recoverability and likely payments. In absence of any scientific basis, we are unable to comment on the same.
vi. Classification of amount recoverable from BSNL as loan & advances instead of Trade Receivable.
vii. The reclassification of previous year figures to make it comparable with the revised schedule VI requirements have been made by the management as per their assessment and relied upon by us.
The overall impact of matters referred to in the preceding paras on the loss for the year is unascertainable.
We report that:
i. We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit;
ii. In our opinion, proper Books of Account, as required by law, have been kept by the Company, so far as appears from our examination of those books except that the following items are consistently accounted on cash basis, instead of on accrual basis as required u/s. 209 of the Companies Act, 1956:
a) Interest Income / Liquidated Damages, when realisability is uncertain;
b) Annual recurring charges of amount up to Rs. 0.10 million each for overlapping period
c) Revenue on account of service connections is being accounted for when the recovery for the same is established.
iii. The Balance Sheet, Statement of Profit and Loss and the Cash Flow Statement dealt with by this report, are in agreement with the books of account;
iv. In our opinion, the Balance Sheet, Statement of Profit and Loss and the Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956 except AS – 2 regarding Valuation of Inventories (Refer Significant Accounting Policy No.3); AS-4 regarding Contingencies and Events Occurring after the date of Balance Sheet; AS -5 regarding Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies [Refer Significant Accounting Policy No.1(i)(b) and ii(a)];AS- 6 regarding Depreciation Accounting [Refer Significant Accounting Policy No. 2(v)];- AS – 9 regarding Revenue Recognition [Refer Accounting Policy No 1(ii); AS- 10 regarding Accounting of Fixed Assets (Refer Significant Accounting Policy No.2);AS- 15 regarding Accounting for Retirement Benefits in the Financial Statements of Employers (Refer Note No.27);AS17 regarding Segmental Reporting; AS- 18 regarding related party transactions: AS 19 regarding Leases: AS -28 regarding Impairment of Assets ; AS-29 on Provisions for Contingent Liabilities and Contingent Assets.
v. Since the company is a Government company, clause (g) of sub-section (1) of section274 of the Companies Act, 1956 regarding obtaining written representations from the directors of the company, is not applicable to the Company in terms of Notification No.GSR-829 (E) dated 21.10.2003);
vi. Attention is further invited to the following without making them a subject matter of qualification: –
a) Point No.13 of Note No.40 regarding over dues of Rs.1000 million on account of Cumulative preference Shares of one of the Govt Company which are considered good on the basis of comfort letter issued by the concerned Ministry.
b) Point No.16 (e) to Note No.40 regarding the issue of pension liability on account of absorbed employees is yet to be settled with the DOT, which may have substantial impact on the profitability of the company which could not be ascertained by the company.
c) Point No.20 of Note No 40, regarding retaining of outstanding liability of Rs. 736.20 millions on account of decommissioned assets pending arbitration case.
d) Point No. 17 of Note No. 40 regarding non provision of diminution in the value of investments in joint ventures as these diminutions are considered temporary in nature.
vii. In our opinion, and to the best of our information and according to the explanations given to us, the said accounts read with the significant Accounting Policies and together with the notes thereon, give the information required by the Companies Act, 1956, in the manner so required and also give, subject to our observations in paragraph 4foregoing, a true and fair view in conformity with the accounting principles generally accepted in India.
